There is a significant divide between the European Union countries with the greatest capacity to innovate, and those with the least capacity to innovate. The difficult convergence process has been proceeding only very slowly and unevenly, and more recently seems to have come to a halt.

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A particular weak spot for the EU is corporate investment in research; in this area, the intra-EU divide is growing. As the business sector is responsible for the persistent R&D intensity gap between the EU and the United States and Asia, the persistent failure of lagging EU countries to catch up in this area provides much of the explanation for the EU’s weak performance compared to other economies.

The evidence shows that the deployment of public budgets and the mix of policies employed by EU member states have tended to aggravate the intra-EU divide.

The EU needs to better understand its growing internal innovation divide if it is to achieve its ambition of becoming a world innovation leader.

1. Introduction

The European Union’s lofty ambition is that its growth should be socially and environmentally sustainable and its future prosperity should be built on foundations of innovation. But ambition has so far not translated into leading performance. According to the European Commission’s 2015 Innovation Union Scoreboard indicator (IUS), a composite indicator developed to assess innovation performance, Europe is not doing well. The EU’s IUS score is only 81 percent of that of the United States. For the moment, Europe still has a substantial lead over emerging markets. But China, with an IUS score still half of the EU’s, is catching up fast. On private expenditure on research and development, a key indicator to assess a nation’s capacity for innovation, the EU is lagging significantly. Its private R&D-to-GDP ratio is 57 percent of the US level. In terms of public expenditure on R&D, there is no gap between the EU and the US. But Europe’s overall R&D-to-GDP-ratio continues to stand at 2 percent, far from the EU’s 3 percent target and significantly lower than the US, Japan, South Korea and Singapore. China has caught up fast and in terms of overall R&D spending is already on par with the EU.

This Policy Contribution examines the EU’s struggle to improve its capacity for innovation, in particular the differences between EU member states in terms of their capacity to innovate. Is the EU’s failure to catch up a failure of its innovation-leading member states to defend and further improve their leading positions? Or is it because its innovation-lagging member states fail to catch up and the EU has not closed the innovation divide between its member countries?

We show a serious divide between EU member states in terms of their capacity to innovate, with convergence taking place only very slowly and unevenly. More recently, the already-difficult convergence process seems to have come to a halt.
In terms of the innovation policies used by member states, the evidence shows that the deployment of public budgets and the mix of instruments might have aggravated the divide.

2. The innovation capacity of EU member states: a growing divide

The innovation capacity of nations measures their ability to generate new ideas and to translate them into economic growth and prosperity (Furman et al, 2002). Because of differences in initial conditions and because of differences in how EU countries have sought to create innovation-based growth, we can expect substantial differences between European countries in terms of innovation capacity. We would however expect that the process of EU integration would allow lagging countries to catch up faster, pushing convergence within the EU in terms of innovation capacity, along with economic convergence. …